I haven’t written about any teasers from Dr. Stephen Leeb lately, but this one caught my eye — he’s got not only a made up term for an investment (the “MCR Plan”), but also a made-up term for how you’ll profit from it (“Income Stacking”).
So the great readers of Gumshoedom have asked for answers, and we’ll try to provide them. First, a wee look at the pitch:
“An overheard conversation leads a man to discover a secret society of investors. But until recently, no one was talking about this proven method of acquiring these “self-liquidating” payouts, at least one every month … Almost like getting an extra paycheck. And anyone can use it.”
So that’s what this “MCR Plan” is apparently about — “self-liquidating” payouts … we do get a loooong story of how this man, “Jim,” learned of the secret — the short version is, he was desperate for better investing ideas and spending a lot of time in his doctor’s office for health issues, he overheard the doctor talking about his investments, and he pestered the doctor until he told him all about this “MCR Plan.” Here’s a small taste:
“Jim’s doctor pulled back the curtain on what we here at Leeb Publishing call the ‘MCR Plan’, which stands for Medical Capital Returns Plan.
“If you’re wondering what this is all about, you’re not alone.
“Parts of this strategy have been used by some of the most successful investors…
“While these and a few other investors have used components of the MCR Plan for years, the complete strategy has only been available for the last 20 years.
“A study published by professors at the University of Chicago and Dartmouth in the Journal of Finance in 1992 shattered the dreams of mutual fund managers and investors everywhere. Using data going back to 1927, their later work shows that most money managers almost never beat the market, and once you pay fees, you may be better off avoiding them altogether.
“So what does lagging mutual fund and lackluster money management returns have to do with the MCR Plan?
“The bottom line is that thanks to their work, we have solid mathematical data that the components found in the MCR Plan make up the safest and most profitable way to grow your money since the Great Depression….
“Even hedge fund billionaire George Soros, the world’s 35th richest man, has taken an $18 million dollar position.
“The mainstream financial media is just now catching on. And when they start pushing it for their own clients, we believe the Plan payouts could skyrocket.”
He goes on to say that these companies benefit from Obama’s health care reform law …
“While ObamaCare will certainly drive up taxes, five of which are scheduled to hit in January 2013, it will also pad the wallets of certain health industry companies. That’s why you need to stake your claim to your own MCR Plan as soon as possible….
“… the participating companies’ products are so fundamental to modern society they just can’t be ignored. They are shielded from economic downturns and political turmoil, making them not merely solid investments…
“But with their growth potential in untapped foreign markets, the sky is the limit. This offers you an unprecedented chance for explosive growth… on the safest terms possible.”
So … you’re probably getting the idea, these “Medical Capital Returns Plan” investments must be, simply put, buying stocks in healthcare companies. Of course, if you put it simply no one will buy your newsletter to find out the secret, but that seems to be the basic idea. So I expect we’ll be learning about some companies that Leeb thinks will continue to do well regardless of how “Obamacare” ends up impacting the medical industry.
And we get a few hints about these companies, which we’ll delve into in a moment, but first we get more hints about what’s “special” about the “MCR Plan” strategy and that “income stacking” thingamabob:
“The MCR plan takes care of you. It is not a gimmick, it is not a DRIP plan, or MLP investment. It’s not about following the talking heads in the financial news media after the latest investing fad.
“Instead, MCR is about using an investment to buy itself. They pay you quarterly, eventually returning all the money you invested. The MCR Plan uses a unique but powerful wealth creation tool called ‘income stacking.’
“These income stacks in turn pay back your original cash investment, while you retain control of the equity.”
OK, so you can probably see through that yourself — apparently their big “income stacking” strategy is … buy dividend-paying stocks and don’t reinvest the dividends, but have your capital returned to you over time, gradually, through these dividend payments. They’re not all that clear, so it could be some slight variation on that strategy, but that appears to be the basic idea.
Which would, by the way, result in much worse returns than reinvesting the dividends, either through your broker or through a DRIP plan, in solid healthcare companies — reinvesting dividends gets you compound interest, so your money makes money that in return makes more money, and it’s that which has made those “buy and hold” millionaires out of folks who started buy socking away just a few shares of Johnson and Johnson (JNJ), or whichever household name you prefer, 60 years ago and just “let it ride.”
But either way, the point is that this is not an active trading strategy — Leeb doesn’t call it “buy and hold”, because no one other than Warren Buffett likes to admit that they believe in that strategy anymore, but that’s the basic idea, buy a stock and collect your payouts and don’t do a lot of trading.
OK, so that’s our plan — buy some medical stocks that pay dividends. Probably not too crazy — after all, big pharmaceutical stocks were the epitome of “widows and orphans” safe buys for decades thanks to their consistency and steady payouts, and are still among the strongest dividend stocks in the market. But which ones are being touted by Leeb today?
“The companies that fall within the MCR plan all have drugs in the late stages of their pipelines — drugs that could change healthcare as we know it.
“Companies that struggled 10 years ago now are gushing with opportunity.
“These are companies that have already FDA approved drugs coming to market that could ‘move the needle’ in healthcare, a multi-billion dollar industry… Drugs that treat diabetes, cardiovascular disease, and cancer.”
And then Leeb goes through them one at a time … here’s the first:
“MCR Component # 1 — A Global Play for Diabetes Dominance
“This company, which we’ll call MCR1, raised its payout 42 years in a row until the last recession set them back. Even then, it didn’t drop the dividend — it just didn’t raise it again.
“This sort of conservative management is part of the strength of this stock, and why its coming breakout move is going to be big. With a price to earnings ratio of 10.83, you can’t keep a good investment like this one down for long….
“… this company has the most potential drugs in the pipeline it’s ever had. 12 are in Phase III testing. An FDA approval could come any day.”
OK, sounds like a fairly typical big, cheap pharma company so far. What are their “secrets” that will let them grow and surprise you?
“One particularly promising Phase III drug is for diabetes, an area where this company until recently was the world leader. With 366 million diabetics, this market is so big that this drug alone promises quantum growth.
“A recent strategic alliance with a top European biotech company positions this company to overtake its top diabetes rival, a powerhouse four-times its size….
“Their 2nd big secret is a new program that gives them first dibs on outside research. This phenotypic discovery process, a first in the industry, has allowed this company to assemble 84,000 chemical structures, 14,000 of which could be the next breakthrough drug.
“The 3rd key to their success is their overseas growth….
“They have just put 2,500 boots on the ground, and just pumped $20 million into a generic pharmaceutical company in China… Sales are up 41% for the first quarter of 2012.”
It’s pretty rare to read a teaser pitch that doesn’t somewhere use the phrase “boots on the ground” — but this time instead of it being Leeb’s boots on the ground in China we’re learning that this company has apparently built a Chinese sales force. Does 2,500 boots on the ground mean 2,500 people, or do we assume that people still generally wear two boots at a time so it’s 1,250 people? Don’t worry, we’ll throw both possibilities into the Thinkolator.
And when we do so, we learn that this must be … Eli Lilly (LLY)
Which is indeed a major pharmaceutical company with 12 compounds in Phase III trials and a robust pipeline, though it’s also one of the “big pharma” stocks that currently has the toughest “patent cliff” problem — they’re right in the middle of losing patent protection on s several of their key drugs that previously made up something like 40% of their revenue, so investors have been a bit skeptical in recent years. The stock has actually been quite disappointing, overall, for about ten years — but has, to give them credit, stepped up and recovered a bit recently as they have pushed to invest their way out of the patent cliff by developing new drugs.
They do indeed have a diabetes “strategic alliance” with another company, Boehringer Ingelheim, to advance their diabetes treatments — the industry leader they’re trying to catch up to is Novo Nordisk (NVO), which is almost completely diabetes-focused and is almost twice as big as Lilly.
And yes, they have raised their dividend pretty consistently, every year from the early 1970s until 2009, when they kept the dividend flat (and they’ve kept it flat since, they have not yet started to raise the dividend again). That’s a slight miss on the teaser facts, since I haven’t seen a 42-year history of dividend raises from LLY (their website indicates they raised for 36 years), but everything else is an exact match so I’m convinced the Thinkolator has this one right.
To dot some more “i’s”, they do have that “phenotypic discovery process” — it was explained thus in a speech by Lilly’s CEO back in March:
“In 2009, we launched a whole new way of accessing promising molecules around the world by collaborating with scientists in academia and small biotech companies.
“Through a program we call Open Innovation Drug Discovery, Lilly carries out screening tests—free of charge—on compounds submitted by outside researchers. In return, we retain first rights to negotiate an agreement with them. If no such agreement results, external researchers receive no-strings-attached ownership of the data report from Lilly to use as they see fit in publications, grant proposals, or further research.
“By the end of 2011, more than 200 universities, research institutes, and small biotechs representing 25 countries – including Korea – were affiliated with the program, and we received some 84,000 chemical structures uploaded into our database for evaluation. Of these, we’ve evaluated more than 14,000 physical samples, the vast majority of which are structurally distinct from those in our compound collection. We’ve entered five collaborations, all ongoing.”
Finally, they are indeed “on the ground” in China — they do have a collaboration to produce and develop “branded generic” drugs, and they invested more in that project recently, this article explains it pretty well.
So that’s our first “MCR Plan” stock — it currently has a dividend yield of about 3.9%, with a dividend that has not recently been growing, and carries a PE ratio of about 13 after the recent jump in the stock price. I don’t know more about LLY than that, but commentary I’ve read generally indicates that people like their hefty investments in R&D but are still turned off by their continuing patent cliff problems that have depressed revenue over the last year or two and will continue to do so — but they did recently post a bit of earnings growth, which is encouraging, and if they can build a bigger diabetes business that would likely provide some nice growth.
It takes a lot to make a giant company like this move ($55 billion market cap, no real net debt), so it’s hard to say whether the impending approval of any drugs will really move the needle so dramatically that you have to feel rushed, but you never know (and since so many pharma investors are dividend focused, any announcement about dividend growth might have just as big an impact on the stock). Analysts expect them to grow earnings slightly next year, but to actually see earnings erosion of ~5% a year for the next several years.
And I think I can get to one more before I have to go take a nap …
“MCR Component # 2 — Poised to Dominate China
“This company, MCR2, boasts 5 major filings in the U.S. between 2012 and 2013 for cardiovascular disease, insomnia, and osteoporosis. These are huge sectors. When any one of these drugs hits the market, you can reasonably expect double-digit gains overnight.
“What makes this one stand out is its new Alzheimer’s drug in the pipeline. There has been very little released in this category, and none of it has been much of an improvement. Even a modest success in this area could be an industry game-changer….
“Savvy investors are piling on. The Soros Fund Management LLC’s 13-F filing included a large position in MCR2.
“If that isn’t enough for you, they have 3 FDA drug approvals for this year alone. Even one approval can be a game changer. When the market catches up to this stock, you can expect it to take the entire MCR Plan value with it.”
And we get a few more clues …
“In 2010 to 2011, this company returned almost $13 billion in income stacks and value to shareholders….
“…just starting to reap the benefits of a major merger….
“In addition to passing through a hefty payout to MCR Plan holders, they are aggressively consolidating the industry, buying up other companies whenever the opportunity arises.
“With total gross sales of nearly $50 billion, they are in a position to swallow any company that might offer a competitive advantage.
“What’s more, they are taking the China market very seriously, and have just invested $1.5 billion into an R&D initiative in China, while already enjoying 31% growth in Japan and 37% growth in China.”
Well, as you can imagine, you can’t easily hide a company that has $50 billion in sales — this, sez the Mighty, Mighty Thinkolator, is Merck (MRK)
Which did indeed have a mega-merger a few years ago (with Schering-Plough) that seemed like a disappointment for a while, but perhaps the impact is showing up in their bottom line now. And they’ve had a very good year, handily beating the S&P 500 over the last 12 months and paying a decent dividend. They froze their dividend way back in 2005, well before the financial crisis, but did start growing it again just this year.
MRK is another “big pharma” that has serious patent cliff issues — and has had for years. The recent expiration of their Symbalta asthma drug is what’s hitting the top line now, but they have a few more significant drugs (not quite billion-dollar drugs, but close) that reach patent expiration soon, and they’ve had more than their share of big ticket expirations in the last few years.
But they do generate close to $50 billion in sales, even if analysts generally expect that number to stay stagnant or drop a bit in the next few years, and they do have potential drugs for cardiovascular disease, insomnia and osteoporosis, among many others, along with a fairly new alzheimer’s compound, though the insomnia, osteoporosis and alzheimer’s stuff is all in early or mid-stage trials, far from approval (going from preclinical research through Phase 1, 2 and 3 and finally submitting for FDA approval takes many years, and most drugs get rejected or dropped along the way).
And Merck did make a big R&D commitment in China recently, that $1.5 billion number is accurate (though it’s over five years) … I don’t know if that means they’re “poised to dominate”, since some folks were speculating at the time of the announcement that this was really just Merck’s way of “catching up” in China after not investing enough in that market, but it’s probably a good strategy given the rapid growth of the Chinese pharmaceutical market.
The other possibility for these clues, though it’s not as good a match, is Sanofi (SNY), which is nearly as big as Merck now and has the added growth potential of Genzyme after adding that big biotech firm to their stable, and SNY is or has recently been a significant holding of Soros Fund Management (Merck hasn’t recently made that list according to my quick perusals of a few recent Soros 13-F filings, though it has in the past). But Sanofi’s drug categories don’t match the teased ones as well, and they haven’t made that large and specific investment in China recently. I think I might actually prefer SNY over MRK just based on their financials, but Sanofi has patent cliff problems that are at least as severe, and they did just have a very disappointing earnings release for the last quarter (didn’t hurt the shares much, since they also said they expect earnings to fall less than expected this year), and analysts have a lot less certainty about SNY earnings going forward than they do for Merck. Both firms are gargantuan, with market caps well over $100 billion, and both are expected to grow earnings very slowly over the next five years, both pay dividends with MRK being a more consistent dividend grower and SNY having a higher yield (5% vs. 3.5%), and both, despite whatever concerns might be out there about regulation of high-priced drugs, patent expirations, and the like, are pretty close to 52-week highs as investors have bid up most of the dividend-paying “big pharma” stocks this year.
So that’s what we’ve got so far, looks like Leeb’s first couple “MCR” plays should be Merck and Lilly, and I’ll get on the rest of those teased picks soon if folks are interested. I don’t own any of these, or any other big pharma companies right now, but I am going to put myself to bed and enjoy some more generic antibiotics. If you’ve got any opinions on favored or flawed big pharma dividend plays, feel free to shout them out with a comment below.
If not, just click here...